Yesterday, NOR flash memory manufacturer and AMD (NYSE:AMD) spinoff Spansion (NASDAQ:SPSN) reported second-quarter results that show that its business continues to improve. Revenues were significantly better than analysts were expecting, but results came up a little short on the bottom line.

While the average analyst estimate called for $616 million in revenue, Spansion reported $655 million -- which represented about a 40% year-over-year increase and a sequential increase of 17%. The gross margin also improved from the 19% level in the first quarter to 20%. Unfortunately, the bottom line was not as impressive, with a $49 million net loss, compared to a $52 million loss in the previous quarter. Earnings per diluted share worked out to a $0.38 loss, compared to expectations for a $0.35 loss.

While the business still had an operating loss of $27 million this quarter, management does expect to reach breakeven on an operating basis during the next quarter, then be free cash flow-positive in Q4. This quarter's results were negatively affected by ongoing separation costs related to its separation from AMD and Fujitsu, but these costs should be much lower in the future.

No matter what you think of the earnings miss, it does look like Spansion's products are being well-accepted. Management claims that its flash memory was used in 96 million handsets (about 40% of all cell phones) during the quarter. MirrorBit products were 42% of revenues, up from 35% in Q1. The high-density SIM product that Spansion teamed up with M-Systems Flash Disk Pioneers (NASDAQ:FLSH) to bring to market has also seen strong demand.

During the current quarter (Q3), the combination of MirrorBit NOR memory used for code execution and MirrorBit ORNAND memory for data storage should start to generate revenues from handset customers.

I find myself intrigued by Spansion's progress, although I do have to concede that this is partly because it seems that so few others are paying attention. The stock price still hasn't done much since the IPO, and the expectations look to me to be fairly low -- the memory biz does tend to be a tough one. It's not too surprising that an investment here would carry some risk for a variety of reasons, including the fact that this company has more than $600 million in debt, compared to $360 million in cash -- and it's currently burning cash.

Furthermore, it will need to make ongoing capital expenditures to keep its memory products competitive. Nevertheless, the MirrorBit products will continue to rise as a fraction of total sales, carrying with them higher gross margins. Also, management has contracted some of its manufacturing to Taiwan Semiconductor Manufacturing (NYSE:TSM), which should reduce the hit to Spansion if there is a meaningful downturn in consumer spending. It also allows the company to convert its factories to leading-edge products without having to cut production of older products.

This is definitely not a stock to buy and forget, but it may be worth a look for risk-tolerant types who don't mind doing some work to really understand this business.

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Fool contributor Dan Bloom owns shares of Taiwan Semiconductor. The Fool has an ironclad disclosure policy.